Comment: the commoditisation of luxury
When the original prototype Hermés Birkin bag designed for Jane Birkin was recently sold at auction it fetched an incredible $10.1 million, which seems like a ridiculous figure for a mere bag (that’s not even that old) and is indicative of how the price of luxury goods is now off the scale.
I’d tend to disagree with the first point and suggest the price of the Birkin bag could arguably be justified because it is a one-off and represents an iconic item in the crazy fashion world. However, I agree with the second point that luxury goods have increasingly priced themselves out of the market because unlike the Birkin bag many now lack any rarity value. The market has been flooded with goods from the large fashion houses – notably France-based LVMH and Kering.
In an interesting interview in the FT with Brunello Cucinelli, the founder of the eponymous cashmere brand, he recalls the Italian fashion brands historically making annual profits of 10% (which is what his firm still makes) but when the industry consolidated – led by the French houses – profit levels then doubled. This came at the cost of seriously increased volumes being pushed out and also outsourcing production to firms in China and other countries to juice margins.
Despite the increasing volumes coming to the market there was incredibly strong demand – especially during the pandemic period – and the luxury houses took advantage of this by increasing prices. Between 2019 and 2023 price increases drove 80% of industry sales growth, according to McKinsey, while a much more modest 20% was attributed to higher volumes.
Subscribe to TRBThe more cheaply made products have ultimately gone on to flood the market and wealthy shoppers have been significantly less inclined to fork out for these increasingly over-priced commonplace items. They have become commoditised and no longer coveted pieces.
Cucinelli asks: “At the end of the day our clients are rich, they know money, so why should they spend thousands of Euros to buy something everyone else has? Or worse, why should they spend 50 times what the brand paid its suppliers for an item?”
Making matters even worse is that a growing number of the fashion houses have been investigated for labour malpractice across their supply chains within which it is no doubt tough to have visibility and control over what exactly is going on in subcontracted factories in China.
The likes of Cucinelli and Hermés along with other independent brands have shied away from the flood-the-market strategies embraced by the big conglomerates and instead kept tight control over their supply chains and focused mainly on servicing wealthier clients. They have ensured that only modest volumes of goods enter the market – to retain the rarity status – and that there is control over production practices.
Cucinelli is an advocate of ‘humanistic capital’ that has a philosophy whereby economic and environmental sustainability and the wellbeing of workers are prioritised over profit. He donates 20% of profits to charitable initiatives and the salaries of his workers are 20% above the Italian sector average.
Not only do such practices ensure Cucinelli avoids the current difficulty of recruiting employees that is afflicting many other companies but he also has a brand with a purpose that consumers are increasingly buying into. Taking a more holistic view of purchases that include environmental and wellbeing aspects is undoubtedly the thinking of growing numbers of consumers in the luxury category. Those with money clearly have the choice of being able to buy into ‘good’ or ‘bad’ companies.
Against this backdrop the big guns in the luxury industry look set to face further pain and financial analysts are not expecting a sector recovery until the second half of 2026. But even then will the luxury consumer be willing to embrace products with limited exclusivity, which is surely the antithesis of luxury.
